The Art of Doing Business in China

A dynamic business environment, evolving regulations, and weak due diligence are some of the challenges facing new business entrants in China.

Data from China’s State Administration for Industry and Commerce show foreign-funded companies in the Chinese mainland topped 481,200 in 2015. As international businesses continue to cast their eyes on the mainland’s vast market potential, an HKTDC China Business Workshop, held in November, featured speakers in management consulting, quality control and law to highlight common mistakes foreign businesses make when doing business in the mainland.

According to Thaddaeus Mueller, Director of Hong Kong-based Fiducia Management Consultants, many firms fail to adapt to China’s constantly changing business environment, including changes in government policies and regulations, resulting in procedural delays.

“Policies such as VAT laws, corporate tax laws and industry-specific regulations are changing,” said Mr Mueller. “Businesses in the medical device sector, for example, are now required to get approvals for products before putting them on sale.” He added that business should closely monitor the mainland’s macroeconomic environment, especially amid continuing uncertainties surrounding the renminbi and Sino-US ties.

He also noted that many new businesses entrants in China often underestimate the importance of human resources. Despite the slowdown, the mainland economy continues growing at a rate of 6.5 per cent annually, leading to expectations of a 10 to 15 per cent salary increment among employees.

“Let’s say you meet a sales manager who has been in business for 15 years and is very successful selling industrial machinery. He doesn’t understand why he shouldn’t have a salary increase, when you’re probably having a hard time explaining why you can’t give a pay rise since the company did not meet its goal for the year.” Mr Mueller advised businesses to think strategically, and work out long-term business plans.

Graduate preferences have also shifted from Western tech conglomerates to Chinese banks, he said. “Five years ago, the most attractive employers were western companies – Google, Siemens, Microsoft. Now, they are Chinese state-owned entities; large Chinese banks and financial firms. I think it’s because they are becoming more structured in the way they employ people and the way they market themselves to graduates.”

Pitfalls in Partnerships

Another potential challenge when doing business in China is in business partnerships. Studying a potential partner’s profile is crucial before entering into any agreement, according to Maximilian Hess, Customer Service Manager of factory audit-services provider Asia Quality Focus. Mr Hess cited a recent case to stress the importance of companies doing their homework beforehand.

“A Shanghai-based client who had been doing business in China for 10 years trusted his instincts when he made a deal with a trader in Hong Kong” said Mr Hess. “He placed a deposit after visiting their premises in Xiamen. But during inspections, he found the products were actually made in Mongolian factories, costing them in extra transportation costs.” He advises businesses to conduct reference checks, and enlist a third-party auditor to perform due diligence on potential partners before investing.

He also warned against misrepresenting one’s company.

“Start-ups will sometimes order minimum amounts in order to receive high-quality service,” Mr Hess said, “They would exaggerate and order 10,000 units when they only actually need 500. Your reputation will be at risk if you downgrade from a container load order to minimum quantity, as you fail to deliver what you promised.” Mr Hess advised sharing business plans with suppliers to allow them to anticipate in the event of a sudden surge in demand and when to cut orders.

Arbitration Considerations

Olga Boltenko, Counsel at global law firm CMS Hasche Sigle in Hong Kong, provided legal insights into doing business in China. Ms Boltenko cited a dispute case between a Chinese and Southeast Asian company. They failed to specify the governing law in its dispute resolution clause, leading to both parties spending millions of US dollars to go before a London tribunal just to decide on the arbitration jurisdiction, a process that took two years before the dispute itself could be heard. During that time, tensions escalated to clashes that lead to deaths and injuries. Ms Boltenko said it is essential for both parties to decide the governing law in the dispute resolution clause to minimise legal costs.

Ms Boltenko noted that several types of disputes cannot be arbitrated under mainland law, including administrative and labour disputes. While discussions on IP are becoming more common, IP disputes are not arbitrable under Chinese law. “A patented solar panel manufacturer from Europe may obtain a favourable award from international courts banning other Chinese factories from infringing their rights. But the Chinese government would resist enforcing it because IP is not arbitrable under Chinese law.” She advices SMEs to consult legal experts on contract issues to prevent the situation from worsening, costing even more time and money.